Here We Go Again on Housing Reform. Is This Time Any Different?


There was a flurry of rumors and a bit of a bull market around the Freddie
Mac and Fannie Mae stock a few weeks ago after Federal Housing Finance Agency
(FHFA) acting director Joseph Otting told FHFA staff that the agency would soon
announce plans to remove the Freddie and Fannie (the GSEs) from conservatorship.
It has been crickets since except for a recent statement from the White House that
it would be releasing a comprehensive framework for housing finance reform “shortly,”
but that no decisions had been made regarding its substance.

Now the Senate is stepping up.  Senate
Banking Committee Chairman Mike Crapo (R-ID) said he is making housing finance
reforms a key focus area for the committee and on Friday released an outline he
said any reform legislation should follow. 
“The outline incorporates elements of many plans and principles for
housing finance reform legislation that have been discussed by legislators,
analysts, stakeholders and thought leaders,” he said.

He called the current system “flawed”, and said his priorities are to
establish stronger levels of taxpayer protection, preserve the 30-year fixed
rate mortgage, increase competition among mortgage guarantors, and promote
access to affordable housing.

The three-page
outline covers the form, operations, and regulating of guarantors, the role
Ginnie Mae would play, transition into the new system, and provisions for affordable


Crapo says guarantors
will be private companies which will guarantee the timely repayment of
principal and interest to investors in mortgages securitized through a platform
operated by Ginnie Mae. Insured depository institutions will not be permitted
to fill this role.  Guarantors will provide
guarantees on eligible mortgages securitized by primary market participants or
issuers and buy them from the primary market through a cash window and
securitize them through the Ginnie Mae platform. 

Guarantors would
be able to hold mortgages in portfolio only to the extent necessary to the
business of securitizing and guaranteeing mortgage-backed securities (MBS) and
will be able to guarantee no more than a to-be-determined percentage of all those
outstanding.  The GSEs will be private
guarantors although their multifamily businesses will be sold and operated as
independent guarantors.

Guarantors will
not be permitted to offer volume-based discounts on the guarantee fee or other
terms and will be required to maintain a minimum ratio of capital. FHFA will be
allowed to establish additional capital requirement and to require guarantors
to engage in approved credit risk transfers (CRTs).

A mortgage
eligible for purchase, securitization and guarantee will generally meet those requirements
for Qualified Mortgages and will not exceed conforming loan limits.

Regulation of Guarantors

The single director structure of
FHFA will be changed into one with a bi-partisan board of directors.  It will charter, regulate and supervise
guarantors, set prudential regulatory standards, and approve guarantors’
pricing. FHFA will also be permitted to establish standards for CRT structures
and maintain existing resolution authorities for insolvent guarantors which
will be allowed to fail. It will have authority to require a guarantor to devest
holdings if mortgages exceed percentage maximums or if the guarantor constitutes
a “grave threat to the financial safety, soundness, or stability of the U.S.
financial system.”   

Ginnie Mae

In addition to
operating the securitization platform and guaranteeing repayment of principal
and interest on securities that receive credit enhancement from guarantors, Ginnie
Mae will provide a catastrophic government guarantee at the security-level to
cover tail-end risk, backed by the full-faith and credit of the United States. It
will operate a mortgage insurance fund (MIF) with a specified reserve ratio as
a percentage of the outstanding guaranteed securities. The MIF will be funded
through insurance premiums paid by guarantors and should it be depleted and
need to draw on the U.S. Treasury, premiums will be raised to reimburse taxpayers
and rebuild the fund.


Deadlines will be established for enforcing the cap on percentages
of guaranteed mortgages and for achieving the required capital ratios.

Technology and infrastructure being developed as part of the
Common Securitization Platform may be sold or transferred to Ginnie Mae. 

FHFA, with the consent of
Treasury, will have the authority to postpone deadlines if FHFA submits a
report to Congress, and the Chair of FHFA and the Secretary of Treasury both
agree and testify before Congress as to why a delay is necessary. 

Affordable Housing

Current affordable housing goals
and duty-to-serve requirements will be replaced with a new Market Access Fund,
which will provide grants, loans, and credit enhancement to address the
homeownership and rental housing needs in underserved and low-income
communities.  This fund as well as the
Housing Trust and Capital Magnet Funds will be funded through an annual
assessment of 10.0 basis points of the total annual loan volume guaranteed by
each guarantor.

While the outline mentions the
GSEs only in passing, in a press release accompanying it Crapo said that after
ten years in conservatorship they, along with Ginnie Mae, dominate the mortgage
market, with more than two-thirds of mortgages backed by the federal
government.  “These government-sponsored entities are currently earning
profits, but if the housing market experiences a downturn-and it will-taxpayers
could again be on the hook for billions of dollars.  This perpetual
conservatorship is not sustainable
, nor is it in the best interest of
consumers, taxpayers, investors, lenders or the broader economy,” he said.

 “We have engaged in a robust process
over the past several Congresses on housing finance reform, holding many
hearings, briefings, meetings and negotiations,” Crapo added.  “The time
is now to resolve this issue and I look forward to working with my colleagues
as we move forward.” 

Randy Noel, chairman of the National Association of Home
Builders (NAHB) issued a statement on behalf of his organization commending Crapo
for attempting to move the housing reform debate forward. The statement also
said, “Momentum on overhauling the housing finance system is clearly
growing, as the administration is also looking to move forward on this issue.”

The National Association of Realtors® has announced it will be hosting a Policy
Forum on the future of GSE reform on February 7. The Washington, DC event is
sold out.

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